Kraft earnings hold steady in third quarter

by Josh Sosland
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NORTHFIELD, ILL. — A strong performance from brands targeting budget-minded consumers helped sustain the financial performance of Kraft Foods Inc in the third quarter ended Sept. 30. Excluding special items, earnings in the quarter were nearly unchanged from last year.

Kraft net income in the third quarter was $1,398 million, or 95c per share on the common stock, up 100% from $596 million, or 38c per share. Sales were $10,462 million, up 19%.

"Earnings per share excluding items were equal to prior year as strong gains from continuing operations were offset by higher interest expense and lower earnings from discontinued operations," the company said. "In addition, the company’s commodity hedging activities negatively impacted the current quarter by approximately $180 million, offsetting benefits recognized earlier in the quarter."

Irene Rosenfeld, chairman and chief executive officer of Kraft, took a positive view of the quarterly results.

"Kraft had a strong quarter in a difficult environment," Ms. Rosenfeld said. "Our operating momentum continued with solid top-and bottom-line contributions from all geographies. I am especially pleased that our volumes in the third quarter held up better than expected, despite significant cost-driven price increases and an unsettled economic environment.

"As family budgets are squeezed, our ongoing programs to add value to products through investments in quality, marketing and innovation are paying off."

In a breakdown of results by division, it was the strength of traditional "value" products rather than "value-added" innovative products that appeared to shore up the company’s results.

Operating income of the U.S. Grocery business was up 5% as sales gains, principally organic revenue growth, more than offset higher input costs.

"Significant volume and mix gains were achieved from marketing the value proposition of Kraft macaroni and cheese and Jell-O dry package desserts," Kraft said. "Lower volumes of pourable and spoonable salad dressings related to cost-driven price increases partially offset the gains."

By contrast, operating income of U.S. Convenient Meals declined 6%. The company blamed a lag in pricing action behind rising input costs unfavorable mix and overhead expenses.

At the same time, the company cited "favorable product mix" as contributing to a 9% net revenue increase for the division.

Operating income excluding special items was up 69% in the U.S. Cheese division, benefiting from an easy comparison to a weak third quarter last year. Pricing during the quarter more than offset the impact of higher input costs, lower volume and unfavorable product mix. Revenues were up 7%, boosted by price hikes that more than offset the volume slump and the product mix effect.

In U.S. Snacks, operating income rose 4% excluding items boosted by price increases, the timing of marketing expenses and lower overhead costs. Operating profits would have been stronger still but for $25 million of gains from hedging activities recognized in earlier quarters. Net revenues were up 4% with pricing more than offsetting lower volume and unfavorable product mix.

"In biscuits, investment in quality and marketing behind core brands such as Oreo, Chips Ahoy!, and Ritz, as well as the success of new Kraft Macaroni and Cheese crackers, contributed to strong revenue gains in the quarter," the company said. "These gains were partially offset by revenue declines in snack bars, due in part to product pruning, and to a lesser extent, pricing related volume weakness in snack nuts."

Operating income in the U.S. Beverages business fell 2%. Prices and volume growth were not enough to offset the effects of higher input costs and, to a smaller degree, unfavorable product mix. Net revenues grew 7%, benefiting from higher prices and volume growth across coffee, ready-to-drink beverages and powdered beverages. Growth in coffee was attributed to share gains from the Maxwell House restage. Premium coffee sales were weak.

Net income in the nine months ended Sept. 30 was $2,738 million, or $1.17 per share, up 37% from $2,005 million, or $1.15 per share in the same period in 2007. Net sales were $31,434 million, up 21%.

Looking forward, the company left its earnings forecast, excluding items, unchanged for the year at $1.88. The company reiterated its forecast of E.P.S. of $2 per share in 2009.

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